The Fed Is Still Worried About Low Inflation

Fed Inflation

According to newly-released minutes from the Federal Reserve’s July meeting, officials are still concerned about slow inflation and might hold off on raising rates until prices inch up.

While inflation might sound bad – higher prices! – it also signals a healthy economy. Stagnant prices mean wages are also stagnant, with fewer dollars chasing too many goods, as the classic Econ 101 description goes. That means that despite lower unemployment and positive GDP growth the economy still isn’t powering ahead.

The Fed has set a 2 percent annual inflation rate as a healthy benchmark for the economy. But for the year ending July, inflation stood at a very low 0.2 percent according to the Bureau of Labor Statistics.

Members of the Federal Open Market Committee, at their late July meeting, seemed to think inflation would increase “over the medium term” if “appropriate monetary policy” were implemented.

“Most members viewed the incoming data as reinforcing their earlier assessment that, although inflation continued to run below the Committee’s objective, the downward pressure on inflation from the previous decreases in energy prices and the effects of past dollar appreciation would abate,” the minutes said.

Many analysts have projected a rate increase at the Fed’s September meeting – it has stood at zero since 2008 – but persistent concerns over a sluggish economic recovery and the recent turmoil over China’s devaluation of its currency have questioned that conventional wisdom.

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“The bet is still that they achieve liftoff in September,” wrote Diane Swonk, chief economist at Chicago-based Mesirow Financial, in a blog post Wednesday. “However, Fed officials need to telegraph that soon if they actually intend to do so.”

The FOMC minutes said that members “agreed to continue to monitor inflation developments closely, with almost all members indicating that they would need to see more evidence that economic growth was sufficiently strong and labor market conditions had firmed enough” to move inflation closer to the Fed target of 2 percent. Only then would they be comfortable with a rate increase.

If the Fed does decide to raise rates next month, officials have signaled that they will keep any subsequent increases at a slow pace to avoid roiling the economy. The minutes also indicated that a rate increase sooner rather than later could indicate positive news for the economy, but given market jitters over monetary policy and the recent yuan devaluation, that might be more theoretical than reality.

Written by Gene Giannotta

Gene Giannotta is a writer based in Washington, D.C. He reports on economic policy, finance and business news.